Buffett's letter: I won a decade of gambling with hedge funds

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This weekend is not a day off for Wall Street. Many fund managers will still start as early as the working day, waiting for the "stock god" Buffett to publish the annual letter of Berkshire Hathaway (hereinafter referred to as Berkshire) to find investment opportunities for the new year.

On the occasion of the new US President Trump just one month, Buffett’s vision of the new government and the future of the US economy has become the focus of attention.

At 8:00 am on February 25, 2017, "Buffet's letter to shareholders" arrived as scheduled. In this annual letter, Buffett continues to reaffirm his optimistic view of the US economy, but at the same time he said, "This is our duty to create growth regardless of whether the economy is smooth or bumpy."

In this letter, Buffett also rarely uses a long space to tell how he won the hedge fund's ten-year gamble, and reminded investors that they should choose low-cost index funds instead of spending money on Wall Street. Management fee.

Since Buffett’s first shareholding in Berkshire Hathaway in 1964, it has been a century-old textile mill that has become one of the most successful insurance and diversified investment groups in the world.

Win a ten-year gamble with hedge funds

Buffett set a $1 million gamble in 2005: With a 10-year period, can hedge fund performance outperform index funds? Buffett thinks impossible. Ten years later, Buffett proved this with practical actions.

After Buffett released the gambling game, Protege Partners partner Ted Seides fought in 2007. In the 2017 annual letter, Buffett announced the transcripts of the two sides for nine years, showing that since the establishment of the gambling bureau, Buffett has selected an index fund with an average annual growth rate of 7.1%, while the asset management company Protege Partners selected five baskets. The average annual growth rate of hedge funds is 2.2%, which means that if you invest $1 million in index funds and hedge funds in 2005, the difference will be between $854,000 and $220,000.

Buffett reminded the investors that when trillions of funds flooded into Wall Street and needed to pay management fees, fund managers generally always get huge profits, not their customers. In short, retail investors should choose low-cost index funds.

Immigration is part of the magic of the American economy

After the new US President Trump took office, he was worried about the US economy and was curious about global investors. Some people worry that Trump’s “protectionist” trade policy is really conducive to the development of American business. In this year's letter, Buffett did not directly mention the Trump administration, but his expression of the US economy shows that his attitude toward immigrants is different from that of Trump.

"Using one word to sum up the achievements of our country is magic." Buffett said that the American economy is not worthy of praise. "Since 240 years ago, the United States has gathered humans in less than three times as long as I am three years old. The ingenuity, the market system, a group of intelligent and ideal immigrants, and laws and regulations to achieve the prosperity of our ancestors' ideals."

Buffett pointed out that the biggest contribution of the US economic magic is the market system. “A system that guides capital, talent, and labor creates the richness of the United States.” He pointed out that this system is also the main system for distributing wealth. “By guiding through federal and local taxes, most of the distribution can be made.”

Buffett once supported the Democratic candidate Hillary Clinton before the US presidential election. Although he voted for the wrong candidate in the general election, Buffett’s Berkshire share price benefited from the US stock market after Trump’s election. Buffett was in the interview. It said that after the announcement of the election on November 8, the company had bought US$12 billion in US stocks, and Berkshire’s share price rose by US$250,000 per share in the historical record at the end of last year.

Trump announced that it will introduce the largest tax cuts since former US President Ronald Reagan. Morningstar senior analyst Gregorrey Warren told Tencent Finance that the plan will redistribute wealth and is the main reason for investors to increase the profitability of US stocks.

Ammunition depot "insurance industry" is in trouble

In the annual letter, Buffett also reviewed the performance of Berkshire's major businesses as usual. Among them, the insurance industry is the core business of Berkshire. Berkshire Hathaway and its insurance business's insurance income and floating deposits have been the "ammunition depot" that supports Buffett's huge investment. However, industry competition and global interest rates have been at a low level for a long time, which has damaged the profitability of the insurance industry.

In the letter, Buffett pointed out that the overall dilemma of the insurance industry, but also said that the low interest rate environment has little impact on Berkshire's insurance industry. "Almost all portfolios of property and casualty insurance companies do not include Kehir - all concentrated on bonds. Once those high-yield investments mature and are replaced by bonds, investment income from floating deposits will fall steadily. Therefore, there is reason to believe that in the next decade, Industry returns are not as good as in the past, especially reinsurance companies."

But Buffett also pointed out that considering Berkshire's financial ability is stronger than the average insurance company, it is more flexible in terms of investment. "When others are restricted, our opportunities are expanding."

In last year's annual letter, Buffett once said that "Berkehill's largest unregistered wealth exists in the insurance industry. We have spent decades creating a multidimensional business model that cannot be replaced." This is one of the reasons why Buffett insists that Berkshire will not split and that the overall value is higher than the value of a single company.

Roughly calculated, Buffett will hold at least $40 billion in 2017 to "hunt elephants" (big mergers). In 2016, he bought the aircraft parts manufacturer, precision parts, for $37.2 billion.

Invest heavily in infrastructure

In Berkshire's non-insurance, capital-intensive sector, Buffett points out that railroad operators Burlington Northern Santa Fe and Berkshire Energy are the most prominent performers in 2016. After-tax operating profit contributed 33%.

Buffett pointed out that the key feature of the two companies is that they have invested heavily in long-term regulated assets. And the investment is funded by a large amount of long-term debt that is not guaranteed by Berkshire.

Buffett pointed out that the two companies invested $8.9 billion in factories and equipment in 2016. "This is a huge commitment to US infrastructure. We like this investment, as long as they promise a reasonable return - in this regard, we Trust in the future of regulation."

Buffett pointed out that "based on our experience and knowledge, society will always need huge investments for transportation and energy. For its own benefit, the government will also guide capital providers to ensure that funds continue to flow to key projects. At the same time, we It will also conduct business in a manner approved by the regulatory body."

The mystery of Buffett's heirs

The successor of Buffett has always been one of the most concerned topics for shareholders. In the annual letter of the year, Buffett praised who, and became one of the focus of attention.

In this year's letter, Buffett continues to praise Ajit Jain, the head of Berkshire Reinsurance. Buffett said, "His operations combine capabilities, speed, and decision-making. Most importantly, he understands the unique way of operating in the insurance industry." Buffett also praised Ajit Jain, "I have never exposed Berkshire to us." Improper risk."

Morningstar senior analyst Gregorry Warren told Tencent Finance that after Buffett leaves Berkshire's position, he will split the dual roles of CEO and investment manager he has assumed into two. Positions. Among them, Ajit Jain will be the top candidate for the CEO position.

In this year's letter, Buffett also mentioned two chief investment officers, Todd Combs and Ted Weschler.

At the 2016 annual meeting, Buffett told Tencent Finance that he is satisfied with the current performance of the two fund investors. "They are now managing $9 billion each." When asked, are they considering continuing to improve the assets managed by the two? At the time of scale, Buffett said that it has not been confirmed in the near future, "but it will definitely be."

This year's letter shows that the fund pool managed by the two fund managers has increased to 10 billion US dollars. In the past two years, Buffett’s portfolio changes have gradually been affected by the two. For example, Buffett’s acquisition of the “new favorite” precision machine is influenced by Todd. In 2012, Todd purchased the stock of precision parts and recommended it to Buffett. This year's increase in holdings of Apple and airline stocks in the portfolio is also said to have been recommended by two investment officers.

In this annual letter, Buffett did not mention the reason for abandoning the Unilever offer, nor did he explain the reasons for the increase in Apple and aviation stocks. Investors are also waiting for Buffett to elaborate on this year's shareholders meeting. In 2017, the Berkshire Hathaway General Meeting of Shareholders will be held in Omaha as usual on May 6.